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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Three Unloved Dividend-Paying Stocks

BOSTON (TheStreet) -- Dividend-paying stocks are gaining appeal as 2010 approaches.

Investors associate dividends with blue chips, the biggest companies with the most money for quarterly payouts. That type of stock, represented by the Dow Jones Industrial Average, has outperformed small-cap benchmarks over the past two months. But there are smaller, lesser-known companies that offer cheap shares and outsized dividends. Here are three that may exceed indices next year.

3. Universal Corp. (UVV) purchases, stores and resells tobacco leaves. It mainly deals in flue-cured, burley and oriental tobaccos, primary ingredients of cigarettes. With a market value of $1.1 billion, Universal Corp. is dwarfed by Altria (MO) and Lorillard (LO). Its dividend is also smaller. Yet, Universal Corp. is the world's leading tobacco merchant and processor, operating in more than 30 countries. Consequently, its growth rates trump domestically focused rivals.

Fiscal second-quarter net income increased 26% to $53 million, and earnings per share climbed 28% to $1.77. Revenue fell 18% to $648 million. Universal Corp.'s net margin, a measure of profitability, widened from 5% to 8%. That figure lags behind those of cigarette-selling peers. Excluding Reynolds American (RAI), the big-name tobacco companies posted lower quarterly sales and profit, even Philip Morris International (PM), whose international focus is supposed to ensure superior growth.

At its current share price, Universal Corp. pays a 4.1% dividend yield. That figure is unremarkable relative to competitors' yields. But a payout ratio of 33% indicates room for distribution growth. Universal Corp.'s stock is cheaper than that of the average tobacco company, based on trailing earnings, book value, sales and cash flow. Its price to earnings to growth ratio (PEG), a measure of value relative to expected profit growth, is low at 0.4. The industry average is 1.3. This means one of two things: Investors expect Universal Corp. to grow below-trend or its stock is undervalued.

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